Fresh Del Monte Produce Inc. (FDP) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Fresh Del Monte Produce First Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I would like to now introduce your host for today’s conference, Ms. Christine Cannella. Please go ahead, ma’am.

So good morning, everyone, and welcome to Fresh Del Monte’s first quarter 2012 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, Senior Vice President and Chief Financial Officer. This call complements our first quarter 2012 press release we made public this morning and you can find the release or register for future distributions by visiting our website at www.freshdelmonte.com and clicking on Investor Relations. This conference call is being webcast and will be available for replay approximately 2 hours after conclusion of this call. Our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures. Before we start, please remember that matters discussed on today’s call may include forward-looking statements within the provisions of the Federal Securities Safe Harbor laws. Forward-looking statements involve risks and uncertainties, which are more fully described in today’s press release and our SEC filings. These risk factors may cause actual company results to differ materially. This call is the property of Fresh Del Monte Produce. Redistribution, re-transmission, or rebroadcast of this call in any form without our written consent is strictly prohibited. Let me turn this call now over to Mohammad.

Thank you, Christine, and good morning, everyone. For the first quarter of 2012, we achieved solid earnings results and we made good progress in laying the groundwork to improve our business for the long term. Although our net sales decreased as compared to the first quarter last year, nevertheless, we established an impressive foothold and grew our business in southern Europe with significant improvements since we took over the marketing, sales and distribution of Del Monte branded products in this market. We are now well positioned for future growth opportunities as a result of this major change. Today, we are the global leader in the branded fresh cut produce business and our first quarter performance in this product line is indicative of the growing consumer demand for convenient, healthy, ready-to-eat products. We plan to further capitalize on our performance by leveraging our existing global distribution network and diverse product line around the world. During the quarter, we took strong steps to become more profitable in the northern European market - banana market by deciding not to enter into sales that do not meet our profitability thresholds. This action is in line with our strategy to not sell just for the sake of selling. Our first quarter was also shaped by the ongoing expansion and non-traditional distribution outlets and increased sales to foodservice customers as we continue to expand our product line and future sources of revenue growth. We continue to invest in production capabilities and product offerings in our prepared food business during the quarter to meet growing demand of Del Monte branded products in the Middle East region, as we continue to grow customer loyalty and awareness of the Del Monte brand. These initiatives are designed to improve operating margins, grow the bottom line and increase shareholder value. And while we progressed in the right direction during the first quarter, we still have a tremendous amount of work to accomplish in 2012. Our focus during the past 2 quarters has been on improving the bottom line, however, we are just as focused on diversifying both our product mix and international expansion to drive top line growth as well. In summary, I’m very optimistic about the future, because first, operationally, we are more efficient. Secondly, we remain committed to our sound mission and strategy. And thirdly, we have a strong balance sheet to support future growth. At this time, I will turn the call over to Richard. Richard?

Thanks, Mohammad, and good morning. For the first quarter of 2012, we reported earnings per diluted share of $1.08 compared with earnings per diluted share of $0.93 in the first quarter of 2011 or excluding asset impairment and other charges, earnings per diluted share of $0.96 in the first quarter of 2011. Net sales were $198 million compared with $974 million in the prior year period. Gross profit was $112 million compared with gross profit of $123 million in the first quarter of 2011. In addition, operating income for the first quarter of 2012 was $66 million compared with $75 million in the prior year period. And net income was $63 million in the first quarter of 2012, compared with $55 million in the first quarter of 2011. Excluding asset impairment and other charges, we reported net income of $62.6 million in the first quarter of 2012 compared to net income of $57.1 million in the first quarter of 2011. In our banana business segment, net sales decreased $30 million to $398 million compared with $428 million in the first quarter of 2011, primarily due to lower sales volume in our Middle East and Asia regions. Sales volume was also lower in northern Europe due to our decision to not renew unprofitable business. Overall volume was 6% lower compared with last year’s first quarter. Worldwide pricing decreased 1%, or $0.20, per box to $15.08, we had stronger banana pricing year-over-year in the Middle East, Asia and Europe. However, the higher pricing in these regions was not enough to offset the absence of a product procurement surcharge we implemented in the first quarter of 2011 in North America. Gross profit decreased $13 million to $39 million compared with gross profit of $52 million a year ago, the result of the lower volume, lower pricing and higher fruit cost. Total worldwide banana fruit cost increased 2% compared with last year’s first quarter. In our other fresh produce business segment for the first quarter, net sales decreased 7% to $421 million compared with $453 million in the first quarter of 2011, and gross profit increased $5 million to $60 million compared with $55 million in the prior year. In our Gold pineapple category, net sales decreased 3% to $118 million compared with $122 million in the prior year, primarily the result of lower volume. Volume decreased 9% with lower production in our Costa Rica growing region. Unit pricing was 7% higher, primarily in Asia, the Middle East and Europe, a result of improved market conditions and the direct marketing in southern Europe, and unit costs increased 2%. In our fresh-cut category, net sales increased 17% to $92 million compared with $79 million in the prior year, as we continue to expand our customer base, distribution channels and global footprint. Volume increased 10%, unit pricing increase 6%, and unit cost was 5% higher than the prior year. In our melon category, net sales decreased 8% to $48 million compared with $52 million in the first quarter of 2011. Volume decreased 24%, a result of strategies implemented last year to continue to reduce our production. Unit pricing was 21% higher due to increased demand, and unit cost was 10% higher. In our non-tropical category, net sales decreased 8% to $111 million compared with $120 million in the first quarter of 2011 on lower volumes of stored fruit and grapes, resulting from inclement weather in Chile, and lower selling prices of avocados. Volume decreased 11%, unit pricing increased 4%, and unit cost was 5% higher than the prior year period. In our tomato category, net sales decreased 53% to $19 million compared with $40 million in the prior year due to lower volume and lower selling prices. Volume decreased 30%, partially due to the planned decrease in volume contracted with growers. Pricing was 34% lower due to an oversupply in the market, and unit cost was 31% lower. In our prepared food segment, net sales decreased $15 million to $79 million during the quarter. The decrease was primarily the result of lower canned pineapple sales volume and lower pricing on industrial pineapple products. The decrease in net sales was partially offset by higher volume and selling prices in our deciduous product line. Gross profit decreased $3 million to $13 million primarily due to the lower sales. Now moving on to costs. Banana fruit costs, which includes our own production and procurement from growers, increased 2% worldwide and represented 29% of our total cost of sales for the first quarter. Carton cost decreased 7% and represents 5% of our total cost of sales. Bunker fuel increased 27% versus the prior year and represented 5% of our total cost of sales. And ocean freight costs during the quarter, which include bunker fuel, third party charters and fleet operating costs was 10% lower despite the increase in bunker fuel costs. For the quarter, ocean freight represented 13% of our total cost of sales. For foreign currency, the foreign currency impact at the sales level for the first quarter compared to the prior year was unfavorable by $4 million, and at the gross profit level, the impact was unfavorable by $2 million compared to the first quarter. Other income expense net for the quarter was a gain of $500,000 compared with a loss of $3 million in the first quarter of 2010 primarily due to foreign currency. At the end of the quarter, our total debt was $171 million. Our credit facility matures in January 2013 and, accordingly, we have reclassified the balance to current liabilities. Income tax expense was $2 million during the quarter compared with income tax expense of $14 million in the prior year period. Income tax expense in the first quarter of 2012 includes credits of approximately $8 million primarily related to the reversal of uncertain tax positions. We expect our effective tax rate for the remainder of 2012 to approximate 15%. As it relates to capital spending for the 3 months ended March 30, 2012, we spent $13 million on capital expenditures. Capital expenditures for the year are expected to be approximately $95 million. This concludes the financial review. We’ll now turn the call over to the operator to begin the Q&A portion of the call.

[Operator Instructions] Our first question will come from Heather Jones of BB&T Capital.

I had a number of questions but wanted to start with other produce, you - in Q4, the profitability performance from that division was very weak and this quarter, there was a sharp reversal and actually you were up on year-on-year. So I was trying to get a sense of how much of the reversal relative to Q4 was due to internal initiatives that will continue throughout the rest of the year, and how much was due to maybe a temporary shortfall in pineapple volumes, et cetera, if you could just give us a sense of that?

I would say with both, Heather, we’ve had a pretty aggressive cost-cutting campaign that we started in the fourth quarter, so some of it is that. But pricing improved and we were short volume in the first quarter as we mentioned.

And in the melon and tomato category, that was a purposeful reduction I guess you continued but the pineapple, that was more timing of harvest, is that a correct understanding?

It was timing - it was the harvest timing, I guess. It’s just weather related event.

Okay. So when we look at Q2, assuming the harvest normalizes and all, I mean do you think you should be able to turn in a performance comparable to Q1 or up relative to Q2 of 2011? I mean how should we be thinking about that?

We do our best, only God will know what the events, but we see the weather - I mean the turnaround of the production is improving than the first quarter, we see better yield now than what we saw in the first quarter. So we expect and we hope and that’s of course something that’s beyond our control if the weather changes or if any event takes place that’s beyond our control.

I’m not trying to belabor this point but given the things that are in your control, the restructuring of tomatoes, the restructuring of melons, I guess the changing in the southern European marketing arrangements. Do you feel like it would be reasonable for us to believe that Q2 results could be comparable to Q1 or is that too optimistic?

Well, we do our best. I believe that we will do well but we’re still - we’re just one month into the quarter, so it’s too early to really tell, but I believe that the second quarter is looking reasonably good as we speak now.

Okay. And as far as southern Europe has changed with the relationship with Orsero, how are you - what are you anticipating for that impact for the full year? Are you realizing better prices than you had under the previous arrangement? If you could give us a sense of how the profitability impact of changing that distribution arrangement?

Well, we do have a better pricing definitely, better return. To start with, there was a sharing agreement on results. And we are quite happy with what we see right now, and don’t forget that we haven’t been in this market ourself as Del Monte in sales and distribution. So we’ve been depending on a third party for the last 30-something years. And I think that getting into the market right now, going forward, will be even hopefully better because, we will get to know better about the market, have a better handle on the market and penetrate it in a different way than it used to be done before.

Okay. EU, did you say - was your local price - I know you said pricing in Europe was up, so I don’t know what your ForEx positions were last year versus this year, was local pricing higher in Europe for you for the quarter?

Local pricing was down about 2.5%.

Okay. And then my final question is, recently, we saw where the courts ruled in favor of you guys relative to Del Monte regarding produce offered in the produce section. I know that there’s a financial award but how - are you planning on making any changes to how you market, et cetera, to take advantage of that decision, I mean what are your plans there?

First of all, Heather, this law suit still has not finalized - it’s not been finished yet. I mean, of course, we have the jury ruling, but still the case is in the court and the judge will have to make decisions as we speak, maybe in the next few weeks. So it is really too early to predict or make any comment on this until the case is finally concluded and we see final rulings.

Our next question comes from Bill Chappell of SunTrust.

Just trying to understand both on the tomato and I guess on the melons, I mean when do we start to kind of lap both on the melon side, the real declines in that business and the rightsizing of that business? And then on the tomato side, when will we start to see signs of kind of the initiatives you put in are generating kind of top line growth?

Well, are you talking about the top line because on the bottom line, there’s been a significant improvement in the melons. If you’re looking just --.

Sure. No -- yes -- no, I mean melons it was more on top line. Maybe I was just trying to understand when that - when the rightsizing of that business really touched in and really see stabilization on that.

I think it would be towards the end of the year because still in the summer months in the U.S. production, we should see a decline as well over last year. Though I think when you get into the winter season again in the fourth quarter is when we should see it lap in melons.

And on the tomato side, just trying to understand the timeline for that project.

In the tomato side, this business has been going through turmoil and the tomato industry, in general, for the last 2 years in the U.S. has been going through very difficult times. There is an oversupply situation and too many companies are really suffering at this time. So I believe that we are in a good position. We are not producers in the U.S. We produce outside, offshore, and we are monitoring this very carefully. But I think, at the end of the day, we are in a position that would be a beneficiary when the time is right.

Okay. And then - but you can maybe remind us I suppose on bunker fuel and then on currency, are you fairly locked in for the next few quarters or I mean I would imagine the comps get a lot tougher over these next 2 quarters?

On bunker fuel, we have very, very little hedged.

Okay.

And on currency, we have - typically, we’re about 50% hedged.

Okay. So that’s how should...

At least on the euro and the yen and pound.

Okay. And then just last question and I understand that there are a fair amount of investments on CapEx and the business is a little bit in transition, but I’m just surprised that there hasn’t been greater share repurchase over the past 6,9 months, especially if you feel like business is going to be getting better and things have stabilized, it seems like a pretty good use of cash.

Yes, we are - we have said before that we buy shares whenever the time is right, and we will do that when we see it is in the best interest of the shareholders and the company.

And - I’m just - maybe I missed it, did you repurchase any shares during the quarter?

No, no, no. We did not.

Okay. So that’s just being more opportunistic?

Correct.

Our next question comes from Jonathan Feeney of Janney Capital Markets.

This is Mark Hall for Jon. My question is related to banana supply demand, and you noted local pricing in Europe was down 3% - or 2.5% in the quarter. What are you seeing now? Our sources indicate that year-over-year that trend has gotten better in Q2, but we would like to see what you’re seeing now? And in North America also, what you’re seeing as you lap the fuel surcharge there?

As far as North American is concerned, we see a stable market, a very normal trend, which we see every year. At this time of the year, usually the banana market are good and stable. We are in transition between the winter - the offshore season and the Californian season. So there is not too many - too much fruit to offer in the market besides bananas and the traditional items, apples and oranges, things like that. So this helps bananas in general. As far as Europe is concerned, we keep our fingers crossed that they will not deteriorate the way that they did last year in the beginning of the second quarter. So - but we are monitoring this very carefully. And as I said in my call just a few minutes ago, that we will not go and sell fruit for the sake of selling fruit and losing tons of money on that. We will have other options, we will have other markets, we will really take the decision that is best for us. So we will be taking it one step at a time.

Our next question comes from Diane Geissler of CLSA.

I wanted to ask you about the European market just from a macro perspective, and I appreciate your comments about northern Europe and reducing your supply into market just given the pricing situation there. But I guess sort of 2 questions. One, sort of what is your all-in - what’s your best guess about how much volume you’ll ship in 2012 versus 2011, given your decision not to take sort of unprofitable sales there? And then I guess to the extent that it seems like the news in Europe continues to worsen, in the last 2 weeks, I think we’ve had a lot of discussion about the French and the Dutch and some of these areas where it seems like they were stable while everybody was worried about southern Europe are now kind of cropping up on the political fronts. I guess I’m just wondering can you give me your viewpoint on Europe and what you see there from a macro perspective and how that’s going to affect the consumer there?

Well, from a macro perspective, I think Europe, and I’ve been saying it for several quarters now, I mean maybe over a year and a half that I have been predicting that Europe will be in a tough situation there. And I don’t see it is going to improve very soon. But as far as our business is concerned, we have been monitoring this very carefully. And I have said earlier that we will not send fruit and lose a huge percentage - or a huge amount of money on that fruit just to be in the market for sake of the market. So I cannot give you an indication of how much fruit will I sell. My total fruit - our total volume will stay the same. I mean we are not going to go and that volume will disappear, but we will have probably other markets to find a home for this fruit. So it’s too difficult to tell you how much fruit we will be shipping in that market at this time. But as I said, we will always monitor the situation. We’re not going to get out of Europe, definitely, but we are not going to as well as dump our fruit there at whatever price that is offered because that will not make sense.

Oh, I guess I’m just curious about the - so the volumes of bananas was down 6% in the first quarter.

It’s by design.

By design.

Yes.

So should we assume that, obviously you’re not reducing production on your own acreage or your sort of your long-term contract, I’m assuming what you’re reducing is that kind of third-party spot purchases, which I have to assume are sort of the higher priced - higher cost supply that you send into Europe is that the best way to think about that?

Yes. We do have a different strategy in 2012 than 2011, which I cannot disclose on a conference call. But we do have different strategy this year than last year. Definitely, we will have fruit to sell or to find markets for, but I think we will not, as I said, dump that fruit in a market where losses - definitely, there might be a loss, but there is a loss between losing $1 a box or $5, $6 a box. So that makes a big difference between how much is your loss during that period of time, which everybody is suffering.

Right. Okay. So you don’t see a decrease in production off your own farms this year?

No, no.

And volume coming off your own farms.

Yes, yes. Our production is normal as we speak, of course, we don’t know what’s going to happen in the next 4, 5, 6 months.

Sure. Because of the weather, I think I understand that.

Yes.

Can’t predict it. I also wanted to ask about the disclosure you have on the sales by geographic region. And just - I’m curious about the decline from the Middle East, I know that’s been sort of a target focus.

Are you talking about bananas?

I’m just talking about the disclosure about your big business segment, where you’re seeing that sales by geographic region, where Middle East was $81 million versus $95 million last year. And I was just curious about...

Yes. Actually, it was mainly because of production. We had less volumes to send to the Middle East. Unfortunately, that - because the Middle East is supplied by the Philippines and the Philippines was short - is short this year compared to last year.

Okay. So that’s not having anything to do with the health of those markets. That was a supply...

No, no, no.

[Operator Instructions]. We’ll go next to Eric Larson.

A quick question, Mohammed, you’ve been very aggressive, it’s sort of a follow-up to some of the questions that have already been asked. But you’ve been very aggressive in restructuring your tomato business, very aggressive restructuring your melon business and now, basically, making a decision in northern Europe to walk away from some really low margin or maybe even unprofitable business for all we know. Are there other, strategically, other places for you to go or have you taken the major steps here to rightsize the sales distribution points of your products?

I think we have overcome I mean the major hurdle. During the last 2 quarters of 2011 and as we speak now, we have done a lot of streamlining our businesses, be it on the - on all levels of business and all divisions, be it on production, be it on management, on logistics, on every aspect, and that has resulted in a very big improvement in our business. Secondly, I think Europe was the major, let’s say, kind of loophole that we addressed in the last couple of quarters and I feel a lot better today than I felt, let’s say, six months ago. So I look at - in future in a much more promising than what I saw last year. But, of course, Europe is not going to change overnight, Europe is going to go still into further deterioration and more difficulties. And we see it every day, I mean we see the consumption is going down, the purchasing power is less and these are the facts of life. We cannot just walk away and - or hide and say that this is not happening. And we need to address that and we are addressing that the way we see fit for our company.

Okay. And then, Mohammad, just a little follow-up on - I’m getting - the reason why I’m stuttering on these questions, I’m getting feedback and it sounds like you guys are trying to ask me a question or something here too, so sorry about that. A follow-up on your prepared foods business, I think the one surprise was that sales were relatively weak in prepared foods, is that a timing issue on your canned pineapple side or what might be a way to think about the performance of that business last quarter?

No, it is the time issue. It - actually, we had less - the crop was delayed and we had less volume to ship into Europe during the quarter. And hopefully, that is turning around, that production is coming back. But industrial side, on the other hand, which is the juice concentrates, the market has weakened in Europe - the European market is really getting weak. There is oversupply coming from Thailand as well. So that has also impacted the situation. But I would say the shortage of the timing of production was a major factor.

Okay. And then just one final question and maybe this is your cash - your re-allocation process. Obviously, you’ve reclassified some debt from long-term into current, is it your intention to pay off all that debt this year or refinance part of it, I mean how do you view the capital structure?

We obviously, will refinance before the end of the year. So we’ll start looking at that in the third and fourth quarter. As we speak, we don’t have huge cash needs, but we will look again at share repurchase, we’ll look at acquisitions as we have been and allocate accordingly. But cash-wise we’re in a pretty good position right now.

[Operator Instructions]. We will go next to Gary Albanese of Auriga.

I just wanted to ask you about the ocean freight. Obviously, it’s down, I think you mentioned 10%, bunker fuel’s up. But I know there’s so much excess capacity right now with the freighters, I mean is this something that you’re envisioning that is going to be perpetual for the next couple of years? Is it going to get even softer, which could be more beneficial to you? And also, how quickly can you enter into new arrangements to possibly take advantage of some lower costs?

As you could see, the bunker has increased, the fuel has increased and our freight has gone down and that can tell you one thing, that we are very efficient in running our business. And I cannot tell you how we do it, but we definitely are very various smart company. I mean we have demonstrated over the years that we adopt and create the opportunities for ourselves how we can improve our business even with challenging times. And this is one of the challenging times that fuel is going up and our freight is going down, so that itself is a testament for how our people and our management is addressing this issue.

Okay. And just lastly, with the legal settlement that was out - that was mentioned earlier, do you expect to book that in the second quarter?

It’s too early. We cannot comment on that. This lawsuit still has not finished and still in the court. And when the time is right, we will - it will be a public announcement.

And there are no other questions at this time. I’d like to turn the conference back to Mohammad Abu-Ghazaleh for closing remarks.

Thank you very much, everyone. I appreciate your attendance and listening to us, and I hope to give you better news next conference call. Have a good day. Thank you, everybody.

That does conclude today’s conference. Thank you all for your participation.